Many business owners may blithely assume that when they pass away, their family members will step in and take over the company as if you were still there. Unfortunately, that’s not a very good assumption, and not a good business succession plan, either.
Successfully transitioning a business to new owners takes time and consideration. No matter what type of business you own, a business succession plan should be an integral part of your overall estate planning. Without it, the business you worked hard to build could be badly handled after you retire or pass, or just closed forever.
A succession plan is more than just designating the “new owner.” It’s about making sure that whenever your business changes hands, it’s in the possession of the right people who will keep operating it and moving it forward. Planning ahead also helps maintain business continuity and the company’s existing culture.
However, failing to establish a business succession plan in the first place can lead to a company’s eventual demise. Here are just some of the pitfalls that can befall an owner and a business that fails to have a succession plan.
Waiting Too Long
“Wait And See” is just not a good idea for succession planning. It’s an invitation for disaster, especially if it’s a family business is in a state of flux from any type of transition. Even if the founder is in good health, there will come a day where he or she will have to hand over the reins to someone else. The time to decide who should be long before the founder reaches this point.
The two issues that a business succession plan needs to address when the owner is no longer at the helm are:
- Who will manage the business
- Who will own the business
This can be one or more family members, assuming there are members who are active in the business or have the interest and ability to continue. Alternately, the owner and founder can choose an unrelated successor if there is no one in the family with enough interest to continue.
Failure To Identify Successive Management
Who do you want to take over the company you founded when you retire, or when you’re gone? What kind of person do you think is suited for taking over?
Not everyone has family members who are suited or qualified to step into the founder’s shoes at the appropriate time. This is especially true of someone with a professional license like a law or medical license. Unless a spouse or child has the same licensure, they can’t just step into the role like they could with a franchise retailer. Therefore, it’s important to identify multiple people who are not only suitable but interested and available.
The person you believe is ideal to run your company may decide to change careers, relocate to another locale, or leave the company for personal reasons. Establishing a pool of qualified candidates and focusing on retention is a better strategy than leaving it up to HR to handle.
Trying To Keep Things “Equal”
This is a common mindset—give everyone an equal share of the business. Unfortunately, the flaw is that not every family member may be actively involved or even interested. It’s more important to consider the best interest of the business.
Without a solid plan for business succession, an estimated 85% of family businesses will fail by the third generation. After that, an estimated 95% fail with the fourth generation.
Many family businesses are passed down to successors who have no idea how to operate them or what’s going on. Whoever you choose as your successor, they need to be involved long before they’re needed.
Is Your Plan Up To Date?
Just like your personal estate plan, a business succession plan needs to be regularly reviewed to ensure it stays current.
What if the person (including an adult child) to who you originally planned to transfer the business is no longer interested? Or the child who was never interested before is now, and is better qualified to take over? Ignoring the current state of your business’s future plans can also have a devastating effect on the business.
Let Provenza Law Guide You Through Business Succession And Estate Planning
Work with an estate planning attorney who understands estate planning law as well as business succession. James C. Provenza is an Illinois estate planning attorney with more than 25 years of estate planning experience and can help with both personal estate planning and business succession. Call our firm today at (847) 729-3939, or use our online contact form.